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May 14, 1998 (9:44AM)
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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[ x ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ______ To _______
Commission File Number 1-584
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FERRO CORPORATION
(Exact Name of Registrant as specified in its charter)
An Ohio Corporation 1000 LAKESIDE AVENUE CLEVELAND, OH 44114
IRS No. 34-0217820
(Address of principal executive offices)
Registrant's telephone number including area code: 216/641-8580
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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At April 30 1998, there were 37,167,391 shares of Ferro common stock, par value
$1.00, outstanding.
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS.
The Condensed Consolidated Balance Sheets as of March 31, 1998 (unaudited) and
December 31, 1997, and the Condensed Consolidated Statements of Income and
Condensed Consolidated Statements of Cash Flows for the three months ended March
31, 1998 and 1997 (unaudited) of Ferro Corporation and Subsidiaries are set
forth in Exhibit 99, which is incorporated by reference herein.
Those consolidated interim financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's annual report for the fiscal year ended December 31, 1997. The interim
figures are unaudited, but in the opinion of the Management of the Company, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation have been made.
The results of the three months ended March 31, 1998 are not necessarily
indicative of the results expected in subsequent quarters.
Cash dividends were paid at the rate of $0.12 per common share in the first
quarter of 1998 and $0.103 per common share in the first quarter of 1997. Cash
dividends on preferred shares were paid at the rate of $0.81 per preferred share
in the first quarter of 1998 and 1997.
Net sales and net income for the three months ended March 31, 1998 were $339.8
million and $17.1 million ($0.43 basic and $0.40 diluted earnings per common
share) as compared with net sales and net income of $342.2 million and $15.2
million ($0.37 basic and $0.35 diluted earnings per common share) for the
corresponding 1997 period.
During the first quarter of 1998, the Company issued $55 million of Debentures
under its Universal Shelf Registration filed with the Securities and Exchange
Commission on October 31, 1995 and declared effective on January 4, 1996. The
notes bear interest at 7 1/8 %, are due in 2028 and pay interest semi-annually.
Effective, January 1, 1998, the Company adopted Statement of Financial
Accounting Standards, No.130, " Reporting Comprehensive Income". This Statement
establishes standards for reporting and display of comprehensive income and its
components. Comprehensive income reflects the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. For Ferro, comprehensive income represents net income
adjusted for items such as foreign currency translation adjustments and minimum
pension liability adjustments. Comprehensive income was approximately $11.8
million and $1.5 million for the quarters ended March 31, 1998 and 1997,
respectively. Accumulated other comprehensive income at March 31, 1998 and
December 31, 1997 was $54.8 million and $50.4 million, respectively.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Comparison Between Three Months Ended March 31, 1998 and 1997.
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Net Sales. First quarter 1998 sales of $339.8 million were 0.7% less than the
$342.2 million of the comparable 1997 period.
Sales declined 1.6% in the Coatings, Colors and Ceramics group and 1.0% in the
Chemicals group but increased 2.7% in the Plastics group. The decrease in
Coatings, Colors and Ceramics was mainly due to the negative impact of currency
exchange. The decrease in Chemicals is primarily attributable to a 1997
divestiture. Plastics sales were higher primarily due to strong demand in the
United States for consumer durable goods.
The variety of products sold by the Company makes it difficult to determine with
certainty the increases or decreases in sales resulting from changes in physical
volume of products sold and selling prices. Management's best estimate is that
the 0.7% decrease in sales comprises: volume, 3.1%; price/mix, 0.1%; currency,
- -3.2%; acquisitions, 0.0%; divestitures -0.7%.
Cost of Sales. Gross profit as a percent of sales was 26.5% as compared to the
25.3% for the comparable 1997 period. This improvement was driven by lower
conversion costs associated with increased volumes and improved manufacturing
efficiencies.
Selling, administrative and general expenses. Such expenses increased 2.6% and,
as a percent of sales were 17.5% in the first quarter of 1998 compared to 16.9%
in the first quarter of 1997.
Interest expense. Interest expense of $3.0 million was comparable to the $3.1
million of last year.
Net foreign currency gain or loss. The net foreign currency gain is primarily
attributable to gains on foreign currency option contracts purchased by the
parent company to hedge the earnings of various foreign subsidiaries.
Other income/expense. Net other expense decreased to $1.0 million compared to
the 1997 first quarter expense of $2.5 million.
Income taxes. The effective tax rate declined from 37.9% to 37.6% reflecting
worldwide tax planning and a favorable mix of income from international
subsidiaries with lower tax rates.
Geographic discussion. Sales were up in the United States and Latin America but
down in Europe and Asia-Pacific. Continued economic turmoil in Asia affected
volumes in that region and combined with a 1997 divestiture, led to the sales
decline. European sales were impacted by negative currency translation.
Operating profits were up in all regions, except for Europe which was flat. The
United States
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continued to be strong with operating profit up more than 10%, reflecting the
impact of improved operating profit in the chemicals and plastics groups.
Asia-Pacific, despite a decline in volume, recorded operating profit improvement
of approximately 35%. Being a local supplier to the ceramic tile market in the
region has helped the Company maintain a competitive advantage and secure
earnings growth. Latin America showed operating profit improvement despite
continued difficulty in the Brazilian economy. European operating profit was
flat due to the negative impact of currency translation, which reduced profits.
Liquidity and Capital Resources
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Working capital. Working capital increased to $210.0 million compared to $149.3
million in the first quarter of 1997. The increase in working capital is
attributable to the proceeds from the issuance of $55 million in 7 1/8%
debentures during the quarter.
Cash flow. Net cash provided from operating activities for the three months
ended March 31, 1998 decreased to $24.9 million compared to the $28.4 million
recorded in the first quarter of 1997. The increase in net cash used for
investing activities is associated with higher level of capital expenditures for
plant and equipment in the first quarter of 1998. The change in net cash from
financing activities is primarily associated with the issuance of $55 million in
7 1/8% debentures during the quarter.
Financing requirements and resources. The long-term debt to equity ratio was
55.6% at March 31, 1998, excluding the loan guarantee of the Employee Stock
Ownership Plan adopted in April 1989, as compared to the 37.3% ratio at December
31, 1997. The increase is attributable to the issuance of $55 million in 7 1/8%
debentures during the quarter. The Company expects to be able to meet the
financial requirements of its existing businesses from existing cash and cash
equivalents and future cash flow. The Company has available to it a $150.0
million five-year revolving credit facility with four domestic banks. There were
no borrowings under this facility as of the close of the quarter ended March 31,
1998. The Company also has $245 million of availability under a Universal Shelf
Registration that was filed with the Securities and Exchange Commission on
October 31, 1995 and declared effective on January 4, 1996, pursuant to which
various types of securities may be issued.
OTHER DEVELOPMENTS
In March 1998, the Company announced that it had signed a definitive agreement
to acquire a majority interest in Ningbo Powder Coatings Company in the Peoples
Republic of China. The transaction is not material to the Company. A new company
called Ferro Ningbo Powder Coatings Company was formed. Ningbo powder coatings
company is an independent powder coatings manufacturer with facilities in
Ningbo, where the company is headquartered and in Xinxiang. Both facilities are
in the eastern region of the country and Ningbo is located approximately 100
miles south of Shanghai.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK FACTORS.
Not Applicable
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS.
No change
ITEM 2 - CHANGE IN SECURITIES.
No change.
ITEM 3 - DEFAULT UPON SENIOR SECURITIES.
No change.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Shareholders held on April 24, 1998, the
Shareholders:
a) Elected three directors to the Ferro Corporation Board of
Directors - Albert C. Bersticker, Michael H. Bulkin and
William J. Sharp - to serve on the Board until the meeting in
the year 2001.
The results of the voting for directors were as follows:
For Against Abstain
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Bersticker 34,157,124.462 0 397,170.164
Bulkin 33,704,392.943 0 849,901.683
Sharp 34,136,865.696 0 417,428.930
The terms of office for Sandra Harden Austin, Glen R. Brown,
William, E. Butler, John C. Morley, Hector R. Ortino, Rex A.
Sebastian and Dennis W. Sullivan continued after the meeting.
Directors A. James Freeman and Paul S. Brentlinger retired
from the Board on this date.
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b) Approved an amendment to the articles of incorporation
increasing the number of authorized common shares from
150,000,000 shares to 300,000,000 shares.
Shareholders approved the proposal to amend to the articles of
incorporation and increase the number of authorized common
shares from 150,000,000 shares to 300,000,000 shares by a vote
of 27,835,132.665 shares for, 6,578,010.767 against and
140,851.194 shares that were present but abstained from voting
on this issue.
c) Adopted a resolution to ratify the designation of KPMG Peat
Marwick LLP as independent auditors of Ferro's books and
accounts.
Shareholders approved the designation of KPMG Peat Marwick LLP
as independent auditors by a vote of 34,348,012.766 shares
for, 106,524.965 shares against and 99,756.895 shares that
were present but abstained from voting on this issue.
ITEM 5 - OTHER INFORMATION.
None.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.
(a) The exhibits listed in the attached Exhibit Index are filed
herewith pursuant to Item 6(a) of the Form 10-Q.
(b) The Company filed one report on Form 8-K on March 31, 1998 for
the quarter ended March 31, 1998. The items reported were the
following exhibits in connection with the offering of 7 1/8%
debentures issued on March 30, 1998:
Exhibit No: Exhibit
(4a-1) Form of Security (7 1/8% Debentures Due 2028)
(12b) Computation of Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FERRO CORPORATION
(Registrant)
Date: May 15, 1998
/s/Hector R. Ortino
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Hector R. Ortino
President and Chief Operating Officer
Date: May 15, 1998
/s/ Gary H. Ritondaro
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Gary H. Ritondaro
Vice President and
Chief Financial Officer
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EXHIBIT 10(b)
SCHEDULE I
Ferro Corporation has entered into executive employment agreements with
the officers listed below. The executive employment agreements are substantially
identical in all material respects to the Form of Executive Employment Agreement
filed as Exhibit 10 hereto, except the lump sum severance payment is equal to a
full year's compensation (base salary and incentive compensation) multiplied by
three in the cases of Albert C. Bersticker and Hector R. Ortino and multiplied
by two in the case of all other officers. These employment agreements supersede
the Amended and Restated Executive Employment Agreements formerly in effect with
the officers (the form of which was filed as Exhibit 10(b) to Ferro
Corporation's Form 10-Q for the three months ended September 30, 1995).
Albert C. Bersticker
David G. Campopiano
R. Jay Finch
James F. Fisher
James B. Friederichsen
D. Thomas George
J. Larry Jameson
Charles M. Less
Hector R. Ortino
Thomas O. Purcell
Paul V. Richard
Gary H. Ritondaro
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EXHIBIT INDEX
Exhibit:
(3) Articles of Incorporation and by-laws
(a) Eleventh Amended Articles of Incorporation. (Reference is made
to Exhibit 3 to Ferro Corporation's Quarterly Report on Form
1O-Q for the three months ended September 30, 1989, which
Exhibit is incorporated here by reference.)
(b) Certificate of Amendment to the Eleventh Amended Articles of
Incorporation of Ferro Corporation filed December 28, 1994.
(Reference is made to Exhibit (3)(b) to Ferro Corporation's
Annual Report on Form 10-K for the year ended December 31,
1994, which Exhibit is incorporated here by reference.)
(c) Amended Code of Regulations. (Reference is made to Exhibit
(3)(b) to Ferro Corporation's Quarterly Report on Form 1O-Q
for the three months ended June 30, 1987, which Exhibit is
incorporated here by reference.)
(4) Instruments defining rights of security holders, including indentures
(a) Shareholder Rights Agreement between Ferro Corporation and
National City Bank, Cleveland, Ohio, as Rights Agent, dated as
of March 22, 1996. (Reference is made to the Exhibit to the
Registration Statement on Form 8-A dated May 15, 1996, which
Exhibit is incorporated here by reference.)
(b) The rights of the holders of Ferro's Debt Securities issued
and to be issued pursuant to an Indenture between Ferro and
Society National Bank, as Trustee, are described in the form
of Indenture dated May 1, 1993 filed as Exhibit 4(j) to Ferro
Corporation's Form 1O-Q for the three months ended June 30,
1993, which Exhibit is incorporated here by reference.
(c) The rights of the holders of Ferro's Debt Securities issued
and to be issued pursuant to a Senior Indenture between Ferro
and Chase Manhattan Trust Company, National Association, as
Trustee, are described in the Senior Indenture, dated as of
March 25, 1998.
(d) Form of Security (7 1/8% Debentures due 2028) filed as Exhibit
4(a-1) to Ferro Corporation's Form 8-K filed March 31, 1998,
which Exhibit is incorporated here by reference.
(10) Material Contracts
(a) Form of Executive Employment Agreement between Ferro
Corporation and certain executive officers.
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(b) Schedule I listing the officers with whom Ferro has entered
into Executive Employment Agreements.
(11) Statement Regarding Computation of Earnings per Share.
(12) Ratio of Earnings to Fixed Charges.
(27) Financial Data Schedule (Electronic Filing Only)
(99) The Condensed Consolidated Balance Sheets as of March 31, 1998
(Unaudited) and December 31, 1997, and the Condensed Consolidated
Statements of Income and Condensed Consolidated Statements of Cash
Flows for the three months March 31, 1998 and 1997 (Unaudited) of Ferro
Corporation and Subsidiaries.